Under an unassuming building on the edge of Toronto Island, a 30-centimetre steel pipe extends deep underground before jutting out into Lake Ontario. The pipe stretches nearly four kilometres to a series of unworldly fabric balloons packed full of compressed air.

An old marine salvage technology, the balloons, or airbags, have found a new function anchored under 70 metres of water.

“They’ve been making them for decades to lift shipwrecks and planes and different things off the sea floor,” Curtis VanWalleghem, CEO of Hydrostor Inc., said in an interview.

Toronto energy start-up Hydrostor has come up with an inventive use for the balloons. Redeployed as part of a system to make renewable energy more reliable, this “air-cavity” technology will help cities peak their power supply on high-usage days.

The technology is well-suited to island nations that lack space onshore, big cities on the coast and renewable power projects.

Hydrostor has already signed a contract to build a plant in Aruba: it will construct a 10-MWt facility on the small Caribbean island to accompany a 30-megawatt wind farm.

Storing surplus electrical energy in a cheap, environmentally neutral way has been the Holy Grail of engineers in the power industry. From next-generation batteries to fly wheels and thermal storage, many new technologies have emerged, but none has been chosen to supplant the traditional method known as “pumped hydro.”

The mechanics of a pumped hydro station are simple. Water is pumped uphill into a reservoir and held there, storing its potential energy. When more electricity is required, the water is released and funnelled downhill to power a turbine.

Hydrostor founder Cameron Lewis was trying to design a small-scale pumped hydro station until he realized the project was not cost-effective.

While investigating alternatives, Mr. Lewis had a breakthrough. “He said, ‘Well, if I’m just lifting water in the air’,” Mr. VanWalleghem said, “’why can’t I just put an air jack under the lake and basically pump it up?’”

This concept is the basis of Hydrostor’s system. Instead of pumping water uphill, the company pumps compressed air underwater.

Hydrostor can store the energy that wind turbines or solar panels produce on sunny or windy days to offset the lack of energy they produce on cloudy, windless days. The technology can offset the risk of blackouts on hot summer afternoons when the power grid is being stretched to its limit by air conditioners.

According to an industry report, the increasing incidence of power blackouts is one of the major issues faced by power end-users worldwide. India, for one, is notorious as a country with a blackout curse and Brazil’s most recent 50-minute blackout triggered a stock sell-off.

In 2010, Mr. Lewis, 39, and Mr. VanWalleghem, 33, got together, threw some start-up money in, left their jobs and began pursuing the idea full-time.

“We were in an attic on Parliament Street,” Mr. VanWalleghem said. “They gave us the crappy space on the top floor so we had to sort of duck to get in there, and we shared a desk and sat there muddling through for the first while until we started raising some more money from angel investors and grant programs.”

It was nearly two years before either man took a salary, and Mr. VanWalleghem contributed almost $100,000 to the project.

After attracting investment and spending time on research and development, Hydrostor launched its pilot project in Lake Ontario just off the Leslie Street Spit. The project spent nearly six months in the water before being decommissioned.

Then Toronto Hydro took an interest in the company’s technology and offered to serve as utility host for Hydrostor’s first permanent facility. With investments from Sustainability Development Technology Canada and the Innovation Demonstration Fund, Hydrostor starting building its demonstration plant near Billy Bishop Airport on the southwest tip of Toronto Island. The plant started storing and generating power at the end of 2014, and cost “high single-digit millions” to build, according to Mr. VanWalleghem.

Like a battery, Hydrostor’s system has three main functions: charge, store and discharge.

To charge its underwater air battery, Hydrostor turns on an air compressor, drawing air in from the environment. Hydrostor sends the air underwater and stores the excess heat from the compression process for use later. “The heat sits right beside the building in an insulated thermal reservoir,” Mr. VanWalleghem said, “anything from packed concrete rocks to pressurized water to graphite rocks.”

To discharge, Hydrostor opens a valve and the system runs in reverse. “When the valve is opened, the weight of the water all around that air cavity forces the air to come up to the lower pressure,” Mr. VanWalleghem said. The air is reheated and begins turning a low-pressure turbine, reproducing power.

While many companies are working with compressed air energy storage, Hydrostor is the only company to have a functioning underwater facility.

“We’re the world’s leader in this space,” Mr VanWalleghem said, and we “look to stay ahead of the curve by getting this project to where it needs to be and then going down and starting to build in the Caribbean.”

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